Microsoft (MSFT) is going on a major cost-cutting diet to reign in expenses. The goal of CFO Chris Liddell is to save billions in costs to compensate for much slower revenue growth (if any) and adjust to a five-year market outlook that's far from rosy. Yep, it's the time-honored way for middle-aged, slow-growth companies to increase profits -- by slicing fat and squeezing perks.

As a result of this new-found frugality, employees of the Redmond, Washington giant will likely be feeling a bit less comfortable in upcoming years. The layoffs of roughly 5,000 employees since January 2009 were eerie reminders that even mighty Microsoft is not immune to the whims of the global economy. With the days of milk and honey on the wane, every pet project, business-class plane ticket, and internal startup is going to be called on the carpet as Redmond ratchets down.
The news of the impending and semi-permanent cutbacks come at the end of what may have been the sweetest run for any software company ever. Until this quarter, the last negative sales growth Microsoft posted was 23 years ago. The company has over $31 billion in cash on the books, a number that is growing by billions each month as license renewals for its popular Office productivity suite and the respected Windows server line rack up cash.

Rather than endure further wrath from angry shareholders, Redmond has decided to swing the axe widely, whacking personnel and prized perks. The company has made business class flights next to verboten and in the process banked $200 million. CEO Steven Ballmer and his cohorts are quickly shuttering businesses that aren't competitive in order to save costs and focus on development efforts deemed more important. Recent casualties include Microsoft's social mashup service PopFly (to close on August 24), the Encarta Encyclopedia, and the popular Microsoft Money consumer finance product.

And all those skunkworks projects, such as LiveLabs, that have been allowed to run wild in Redmond? Most of them are looking at their numbers and polishing their pitches to ensure that upper management doesn't view them as cost centers rather than hubs of future profits. Liddell is talking about moving more operations to offshore locales where wages are lower. Heck, Microsoft may even decide to rent out Bill Gates' office.

The broad economic downturn clearly hit Microsoft hard this past quarter, when Redmond reported abysmal numbers, including sales shrinkage across all of its key product lines. Investors have been encouraged by the Yahoo search engine deal announced on July 29, sending Microsoft shares up nicely in the wake of the deal. But even if the search deal hits all its numbers, revenue generated by the tie-up will pale compared to sales of Microsoft's core software franchises. So Ballmer and Liddell are likely to keep cutting as an increasingly middle-aged Microsoft regroups and rethinks spending priorities for a future that suddenly appears more bleak than at any time in the past decade.

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